The business logic behind building an Amazon phone

An Amazon phone might make more sense than you think

Over the last month or so there have been enough informative leaks to say, almost with certainty, that Amazon will be releasing a phone. I say "almost" to leave the door open to a change in plans, however small that chance may be.

I recently learned that Amazon has hired several former BlackBerry designers. It sounds like they've brought smart people on board, and I can certainly understand why a good engineer would be tempted to go work for Amazon in light of what's happened to BlackBerry over the past few years. BlackBerry has almost entirely lost its consumer market share and is busy returning to its enterprise roots. On the other hand, Amazon is practically 100 percent focused on the consumer — aside from its obvious leadership in cloud computing, which is enterprise and small-business focused.)

It's interesting to think about Amazon's intentions here. How will it make money selling phones if it doesn't plan to sell them at a profit? Jeff Bezos has repeatedly said he doesn't want to make money when you buy the phone, but instead when you use the phone.

The tablet argument

When it comes to modern mobile devices, Amazon got its start with the Kindle Fire tablet. If you look at the tablet market, obviously the first name that comes to mind is Apple. The iPad dominates the space. But who's next? Samsung is probably No. 2 … and behind Samsung (or ASUS, perhaps?) there are probably dozens and dozens of other Android vendors who sell relatively small volume. And then there is Amazon, which has sold millions of Kindle Fire and Kindle Fire HD tablets that run a forked version of Android. It wouldn't surprise me if Amazon was the No. 3 player in the tablet market at this point.

So we have Apple, and we have two wildly varying Android-based brands. The first brand, Samsung, is working on trying into its own ecosystem, but not nearly to the same extent as Amazon, which is completely off the Google reservation. Amazon has Prime, Instant Video, music and, of course, online shopping.

Back to phones ...

Now let's turn our attention to phones. The smartphone market is much bigger than the tablet market, but the dynamics are similar. Apple has a very strong position, and so does Samsung. After Samsung the numbers really drop off with HTC, LG, and other Android vendors practically all losing money and fighting for profit on hardware without any platform tie-in benefit for the manufacturer.

Why shouldn't Amazon be able to translate its tablet strategy to smartphones?

In phones, Amazon should be able to make a pretty effective pitch. They don't need to make money on the hardware. Heck, why even bother trying if nobody else can make money competing with Samsung? So you give away the phones at cost, and you go after the dollars that people spend while using their devices. Tablets get used a lot, sure. But phones? We take them with us everywhere we go. We're more likely to take our phone than our wallet if we're running out for a quick coffee at Starbucks, for example.

As the average person uses his or her phone more and more as a way to spend money, Amazon probably sees a way to profit from this. Given that Amazon tablets run Android and it's managed to score many of the major apps people care about in its own app store, so if the phones are good quality and the experience is as great as we're used to with Amazon already … hey, why not make a smartphone?

How to make money 101 ...

Let's do a quick rundown of how Amazon can make money when people use their tablets and phones

Revenue sharing on all app sales and in-app payments.

Amazon can promote audio subscriptions that it owns such as Audible (audio books).

They could create a mobile payment service that ties into the hundreds of millions of credit cards they have on file.

They could use your (non personally identifying) data to create a mobile ad exchange that developers use in their applications.

Maybe they can bundle services like Prime and Instant Video into the cost of the phone, or if they launch as an MVNO, into the cost of the monthly data plan.

I'm sure there are more ideas that Amazon's team can think of. They're smarter than I am.

Notice that almost all of these money-getting techniques exist for Apple and Google, but not for a hardware vendor like Samsung, LG, HTC, etc. The only exception is Prime, Instant Video and the potential for Amazon to launch its own MVNO network …who knows if this is happening?

I realize Amazon is not nearly as big as Apple or Google in the mobile game. But at least starting in the U.S. market, Amazon's got a big enough consumer footprint to have a go at it. I'd like to see them either launch on multiple carriers or simply launch an MVNO so they control the entire user experience.

Should Amazon do phones? If it can justify doing tablets, then it should absolutely be able to justify making a smartphone.